An investment firm that provided a fairness opinion and valuation on a trio of controversial Latin American cannabis assets purchased by Aphria Inc. has issued a research report that appears to defend the legitimacy of those assets.

In July 2018, Haywood Securities Inc. provided the opinion to Scythian Biosciences Inc., a Florida-based company that sold the package of assets based in Columbia, Argentina and Jamaica to Aphria.

Aphria shares plunged in December after a short-seller report alleged that assets were largely “worthless.”

On Thursday, a day before Aphria was scheduled to release its latest quarterly earnings, Haywood analysts Neal Gilmer and Ethan Spence released a report providing detailed evidence — primarily through photos — of the Leamington, Ont.-based company’s assets in the three countries, calling them “broadly in-line” with expectations.

“We can confirm that there are operations ongoing with the assets at varying levels of development,” wrote the analysts, who added that they visited some of Aphria’s Latin American sites in December 2018, to assess the validity of short-seller claims.

Aphria has a 90 per cent stake in licensed Colombian producer Colcanna SAS, which is currently developing a 56-acre plot of land in Chinchina, one of the country’s coffee regions. Haywood’s team confirmed that there was indeed a plot of land roughly 56 acres in size undergoing widening and drainage work needed to begin construction of a cannabis facility that will consist of a greenhouse and 16 grow rooms.

Shortsellers Quintessential Capital Management and Hindenburg Research claimed, in their December report, that Aphria’s Colombian asset was an office with just five employees and “not much else.” The report also claimed that Colcanna was still in the licencing process and had not yet begun production.

Haywood’s analysts say that Colcanna’s head office in Manizales, Colombia has eight employees, with “more at a satellite office in Bogota.” They also confirm that Colcanna holds licences for the cultivation and sale of “psychoactive and non-psychoactive” cannabis.

But they don’t dispute the fact that Colcanna has not begun production — the report states that construction on Colcanna’s site is expected to begin in March or April 2019, and be completed by the end of the year.

Aphria has said that when fully operational, their Colombian facility has a potential capacity of 50,000 kgs. “In our opinion the Colombian asset is the asset that holds the most opportunity for Aphria,” wrote Gilmer and Spence.

There is little need for a large sophisticated operation given the main assets of the company are the farm … and retail locations that will be establishedHaywood Securities

Aphria’s Jamaican assets were perhaps the most concerning for investors after the short-seller report presented pictures of an abandoned office that the report claimed was the site of Aphria’s Jamaican operations. The short sellers also claimed that Marigold Projects Ltd., the Jamaican company that Aphria had acquired in late September 2018 owned a mere “plot of raw land not approved to grow cannabis,” not a cannabis farm as Aphria had claimed.

But the Haywood report provides pictures of what appears to be a cannabis farm within a small greenhouse flush with plants. Marigold’s management also told Haywood’s team that they had built up an inventory of 2,500 to 2,600 kgs of cannabis, and was waiting on approval to commence sales.

The analysts also toured what they said was Marigold’s head office, which was located at a different address than the official registered office cited in the short report.

“The corporate office is modest containing the basic necessities needed to operate Marigold given its current stage of development,” wrote Gilmer and Spence. “There is little need for a large sophisticated operation given the main assets of the company are the farm where the cannabis is grown and retail locations that will be established across Jamaica.”

Aphria’s Argentinian assets also appeared to have substantial value, according to the Haywood report. In reviewing documents with management of ABP — a pharmaceutical distribution company purchased by Aphria in the fall of 2018 — Haywood’s analysts said that the company generated almost US$11 million in revenue last year through the sale of various inventory and over-the-counter products, none of which includes cannabis.

Aphria’s hope, in purchasing ABP, is that the pharmacy would act as a distributor for medical cannabis, once it becomes legal, and that its Leamington facility would be able to export cannabis directly to ABP to dispense.

Haywood’s analysts appeared to agree with that valuation. “Ultimately our view is that ABP will be able to facilitate and participate in medical cannabis in Argentina, which is at current time not legal,” they wrote.

Our review of the company’s assets backstops our fundamental view that there has been an overreaction on the sell side over the last month

Haywood Securities

The short-seller report had alleged that ABP was “just one pharmacy, with virtually no digital presence and a handful of employees.” In order to distribute medical cannabis in Argentina — if and when it becomes legal — businesses have to own a pharmacy, the Argentinian government has said.

Haywood’s overall conclusion to investors was that the risk factor in investing with Aphria was still “very high” due to stock volatility and the potential hostile bid by U.S. retailer Green Growth Brands. Despite those cautions, the analysts stuck to their buy rating and projected a 46 per cent return for investors.

“Our review of the company’s assets backstops our fundamental view that there has been an overreaction on the sell side over the last month,” the report said.

Aphria has yet to respond at length to the short-seller allegations, though CEO Vic Neufeld did give up the post of chairman and was replaced by former Hain Celestial CEO Irwin Simon. An independent committee was also appointed in mid-December to review the allegations.

Neither Aphria, Quintessential Capital Management or Hindenburg Research could be reached for comment at publication time. Haywood’s analysts also did not respond to requests for comment.